Overcoming Bangladesh's current macroeconomic challenges relies largely on the political will of those in power, economist Masrur Reaz says.
According to him, progress will only be possible if there is a clear political commitment to prevent any particular group from holding the economy hostage.
He argues that a handful of isolated reforms will not be enough to revive the economy. Instead, long-term reform plans are needed to improve market competitiveness and create a better investment environment.
Ahead of the national budget, Reaz shared his observations on a range of economic issues during bdnews24.com's discussion programme “Inside Out”.
Reaz is the chairman of private research organisation Policy Exchange Bangladesh and conducts research on macroeconomic issues.
The interview was broadcast on bdnews24.com's YouTube channel and Facebook page.
During the discussion, he offered recommendations on inflation, essential commodity markets, energy shortages, non-performing loans, the tax-to-GDP ratio and the banking sector.
The BNP government, which came to power through the general election in February, is set to present its first national budget on Jun 11. Public expectations are high, particularly regarding relief from persistent inflation.
Referring to the current situation, Reaz said: "Bangladesh's economy has been going through a challenging and crisis-ridden period over the past several years."
He described inflation as the most significant problem.
"Whether we call it 12 percent, 9 percent or 8.5 percent, it is still high inflation. People are suffering because of it."
Inflation began climbing in 2021. The previous Awami League government frequently cited the COVID-19 pandemic and the Russia-Ukraine war as key reasons for the surge, although many observers also blamed corruption during that period.
The Awami League administration attempted to curb inflation by increasing policy interest rates but had limited success.
After taking office on Aug 5, the interim government adopted a tighter monetary policy. Under governor Ahsan H Mansur, the Bangladesh Bank raised policy rates several times to 10 percent. Although inflation eased somewhat, it remained above targets.
According to the Bangladesh Bureau of Statistics (BBS), overall inflation stood at 9.42 percent in May, the highest level in 16 months.
Reaz noted that while higher interest rates may help contain inflation, they also come with costs.
"As a result of higher rates, borrowing costs for businesses have risen to between 13 and 15 percent. This has increased operating expenses, and many businesses cannot absorb those costs."
He identified infrastructure constraints, particularly shortages in energy and gas supplies, as the second major challenge facing the economy. The third, he said, is weaknesses in the legal and governance framework.
As an example, he argued that the Investment Act of 1980 is completely out of sync with today's global investment landscape and digital economy.
At the same time, he pointed to several strengths within the economy, particularly Bangladesh's large labour force.
"Despite producing neither the raw materials nor the machinery used in the garment industry, Bangladesh has become the world's second-largest apparel exporter after China."
"Our working-age population is something many countries would envy. It is one of our greatest strengths."
He also highlighted Bangladesh's geographical advantages, describing the country as a connector between South Asia and the ASEAN region.
However, he questioned how far the ready-made garment sector alone can carry the economy.
"The garment sector has crossed $46 billion in exports and is moving toward $50-60 billion. Yet no other export sector has managed to surpass the $2 billion mark."
"The burden of exports, employment generation and production cannot rest solely on garments. Other sectors must also contribute, but we are not seeing that happen."
On employment, Reaz noted that between 2 million and 2.2 million young people enter the labour market every year, but quality formal sector jobs remain scarce. Nearly two-thirds end up working in the informal economy.
Describing the slowdown in investment, he said private investment has fallen from 24 percent of GDP to 22 percent, while foreign direct investment (FDI) has dropped below 0.5 percent of GDP.
To address these challenges, Reaz called for institutional reforms. However, he acknowledged that reforms often face resistance.
"Those who stand to lose influence or privileges are always opposing reform. Their long-standing comfort zones disappear."
Although he views some of the reform initiatives undertaken during the interim government's tenure positively, he does not consider them sufficient.
"We needed a comprehensive reform package for investment. One or two isolated reforms may be useful, but they will not take us very far."
Finance Minister Amir Khosru Mahmud Chowdhury is scheduled to present the budget for fiscal year 2026-27 in parliament on Jun 11.
The budget comes at a time when inflation has reached a 16-month high, implementation of the Annual Development Programme (ADP) has fallen to record lows, and the trade deficit has widened by around 22 percent due to declining exports.
Against this backdrop, Reaz said the government's biggest challenge will be balancing development spending with efforts to control inflation.
"Should the government keep the budget small to contain inflation, or should it respond to public expectations and increase development spending? Finding that balance is the number one challenge."
He recommended prioritising inflation management, ensuring energy supplies and strengthening social safety net programmes.
According to Reaz, the second major challenge is the “snare” of the country's revenue shortfall and growing debt burden.
Bangladesh's tax-to-GDP ratio remains below 7 percent, the lowest in Asia.
He noted that debt obligations in fiscal year 2025 have increased by 228 percent compared to 2020.
"That means we cannot borrow indiscriminately. We must borrow carefully, selectively and with caution."
Discussing debt repayment pressures, he referred to the country's foreign currency shortages and stressed the importance of support from development partners.
The Asian Development Bank (ADB) has pledged $5 billion in assistance over the next five years, while discussions are ongoing with the International Monetary Fund (IMF) over a new $5 billion programme.
"I have heard that the government is negotiating a new $5 billion programme with the IMF. We need that money," he said.
"First, it will help stabilise our foreign exchange reserves. Second, if the IMF suspends support, other development partners such as the World Bank and ADB often follow suit and suspend budget assistance as well."
Some have suggested increasing tax rates to boost revenue collection. Reaz warned that such a move could backfire and instead advocated expanding the tax base.
"Unless we formalise the 70-80 percent of the economy that currently operates informally, revenue collection will not increase significantly."
"Secondly, only 4.5 million of the country's 13 million TIN holders submit tax returns. Enforcement must be strengthened. Thirdly, the culture of tax exemptions needs to end."
He also emphasised the need to restore discipline in the banking sector.
Among his recommendations were reforms to asset management laws, amendments to the Bangladesh Bank Order to restore central bank independence, and restructuring of the Money Loan Court system.
According to Bangladesh Bank data, non-performing loans now account for nearly 36 percent of total loans.
Reaz observed, "Almost one-third of the banking sector's assets, which should be contributing to the economy, are not being utilised effectively. A practical solution must be found."
On the capital market, he argued that the problems go beyond short-term protests or policy discussions.
"Because Bangladesh lacks a strong long-term financing market, pressure on banks continues to increase."
"The market should become more institutionally driven rather than relying heavily on small individual investors."
The issue of whitening undisclosed income often resurfaces during budget season. This year is no exception.
Reaz opposed blanket opportunities for legalising black money but suggested that undeclared yet legally earned income could be regularised through higher taxes and penalties.
Investment activity, which slowed during the interim government's tenure, has yet to fully recover. Riaz attributed this partly to political uncertainty and a lack of confidence.
"The government took nearly a year to clarify when elections would be held and when an elected administration would take office. That uncertainty significantly damaged investor and business confidence."
"I believe confidence would have developed had the interim government provided greater clarity on elections much earlier."
Many observers argue that a small group of influential business interests has effectively held both the banking sector and essential commodity markets hostage.
Asked whether the BNP government can free the economy from such influence, Reaz replied: "Whether it can or cannot depends entirely on political will."
